RBZ role comes under renewed focus

A monetary policy committee comprising Dzinotizei Mutasa, Brains Muchemwa, Rudo Faranisi, Kennias Mafukidze and Professor Tony Hawkins was set up in February, but questions abound as to what the role of the committee is.

This development has caused anxiety as some commentators speculate the committee is preparing for a return to the Zimbabwe dollar, whilst economists argue there is in fact no need for it in a multicurrency regime.

The primary objective of the RBZ, created in 1956, is supposed to be to maintain the value of the Zimbabwean currency decimated by hyperinflation in 2009. The bank is also responsible for the formulation and implementation of monetary policy, directed at ensuring low and stable inflation levels.

A further core function of the institution is to maintain a stable banking system through its supervisory and lender of last resort functions. Other secondary roles of the bank include the management of the country’s gold and foreign exchange assets. It is also supposed to be sole issuer of currency and banker and advisor to government.

However, the functions of the RBZ have now been reduced and its role limited under the multicurrency system.

Prominent economist and member of the RBZ monetary policy committee, Hawkins says the RBZ now has a minimal role to play as far as monetary policy is concerned. “I believe the main role of the central bank at the moment is to regulate and supervise the financial sector to ensure that banks do not take huge risks”, he said, adding the RBZ is technically insolvent due to huge debts and lack of capitalisation.

The central bank has received only US$7 million in new funds since the advent of the multicurrency system, severely limiting its scope, particularly as a lender-of-last-resort in an economy reeling from a liquidity crunch. There are plans to inject more than US$100 million to boost its-lender-of-last-resort function, although some say at least US$150 million — or 5% of total banking system deposits — is needed.

The bank is saddled with more than US$1,2 billion in debt and this, coupled with its current poor capitalisation levels, severely constrains its function and role.

The central bank also seems to have somewhat relinquished its role of being banker to the government. Traditionally, the principal account of government, or the so-called Exchequer’s Account, resides at, and is managed by, the central bank.

However, most, if not all government departments and ministries, including the Zimbabwe Revenue Authority, now hold active accounts with various commercial banks. In a normal environment, foreign missions and other international institutions and banks would also hold accounts with the RBZ. But this has changed because of the bad experiences these institutions have had with the central bank.

While placing their money with commercial banks may have in some instances improved the efficiencies of the day to day operations of the affected government departments, one major bank which carries a significant proportion of the government’s business suffered severe liquidity challenges at the end of last year when there was surging demand and large value transactions it failed to handle.

Whilst the RBZ is subordinate to the parent Ministry of Finance when it comes to fiscal policies, it is the traditional role of the RBZ to feed into the formulation of fiscal policy and to ensure monetary policies are consistent and supportive of fiscal initiatives of government.

Economic commentators say the RBZ no longer has a significant role to play. But the central bank argues its “rigorous supervision and vigilant surveillance of the financial system” has ensured continued financial stability and as a result, the banking sector has remained in a “safe and sound” state, notwithstanding certain underlying risks.

The bank also has the sole responsibility for the management of the national payment system and promoting alternative forms of payment mechanisms and the use of plastic money platforms such as ATMs, Point of Sale facilities, as well as electronic, cellphone and internet banking products and services. In the midst of criticism, the bank has defended its role and the monetary policy committee made up of the governor as the chairman, the two deputy governors, deputy chairman and not less than five but no more than seven other members appointed by the president in consultation with the Minister of Finance.

RBZ governor Dr Gideon Gono (pictured) said this week in response to questions from the Zimbabwe Independent the bank was still important and its committee was useful. Although he admitted its role has been reduced under the multicurrency regime, he said it was still critical in “ensuring monetary and financial stability”.

“Zimbabwe adopted a multi-currency regime in February 2009, in which residents became free to transact in any of the major currencies such as the US dollar, British pound, South African rand, Botswana pula, and other internationally convertible currencies, with the US dollar being the settlement currency,” Gono said.

“Under this arrangement, the Zimbabwe dollar is no longer operational resulting in the RBZ losing one of the key traditional roles of the central bank, that of issuing the country’s legal tender. Analysts have, however, questioned the role and relevance of a monetary policy committee in Zimbabwe, given that the scope of the traditional monetary policy function has been reduced by the adoption of the multi-currency system.”

Gono admitted the central bank’s role has been curtailed but insisted the bank remained important and the committee useful. “The adoption of the multiple currency system has resulted in the country losing some monetary policy autonomy. As a consequence, the traditional monetary policy instruments of currency issuance, interest rates and exchange rate management are no longer at the disposal of the RBZ,” he said.

However, he said the bank remains key in ensuring “financial sector stability, national payment system, policy advice to government and being lender of last resort”.

“Central banking by monetary policy committees has become the rule rather than the exception, and it is often argued that collective monetary policy decision-making results in better outcomes due to the pooling of information, models and expertise,” he said.

“Notwithstanding the relative loss of control of monetary policy instruments following the adoption of the multi-currency regime, the RBZ is currently seized with policy matters in relation to other core mandates of the central bank, such as bank licensing, supervision and surveillance; economic research and policy advice; national payments systems and market-friendly exchange controls (particularly on the capital account). All these areas present the monetary policy committee with sufficient scope for influencing the direction of central bank policies and the economy at large.”